Cheniere Energy: A Solid Long Term Bet

The bounty of natural gas found in the U.S. has enabled the country to focus on the export opportunities to different markets around the world. The natural gas exports received a boost due to the high amount of shale gas found in the U.S. and the price difference for natural gas in various regions. Natural gas costs around $4 per million British thermal unit, or Btu, in the U.S., while it is more than $10 per million Btu in Asia and Europe. The export potential of natural gas has opened up opportunities for oil and gas players to build infrastructure. Cheniere Energy (LNG) is one such company investing majorly in its infrastructure development to export natural gas. With two projects, Sabina Pass project and the Corpus Christi project, to export natural gas, Cheniere is vying to take a leading position among the natural exporters in the U.S.

Is the road to LNG Export pacing up?

Last year Cheniere applied for approval from the Department of Energy, or DOE, for its Corpus Christi project to export Liquefied natural gas, or LNG, from the U.S. Approval from the DOE is required to export or import natural gas into the U.S. This project is located in Corpus Christi Bay, Texas. The company is requesting to export natural gas up to 2.1 billion cubic feet per day, or Bcfpd, for a period of 22 years. Natural gas is generally transported in the form of LNG. The project will have three LNG trains with the capability to process and export 5 million metric tons per year, or Mtpa, of natural gas. LNG trains are used for purification and the liquefaction of natural gas.

In September this year the DOE approved Dominion's Cove Point project to export up to 0.77 Bcfpd LNG over a 20 year period. On August 7th, it also approved the Lake Charles project to export 2 Bcfpd, which is owned by BG Group and Energy Transfer Partner. Cumulatively, the DOE has now approved a total of four projects (three this year) for non-FTA LNG exports totaling 6.6 Bcfpd of export.

The free trade agreement, or FTA, is an arrangement between countries that minimizes the tariff barrier for the export or import of goods and services. The U.S. has FTA agreements with 20 countries around the world. As can be studied from the table below, the duration between approvals for natural export projects has come down from around two years to around a few months. With the approval of Cove Point project, Cheniere's Corpus Christi project comes fifth in line to be reviewed by the DOE for non-FTA approval. The following table details the list of the approval from the DOE.

Chaniere's Corpus Christi project location in Texas, is strategically important. Texas is one of the largest natural gas producing areas in the U.S. with production of around 19.7 Bcfpd, which is expected to increase. According to the U.S. Energy Information Administration, or EIA, the shale gas production rate this year will be around 69.3 Bcfpd, an increase of 12.9% from output of around 61.4 Bcfpd in 2010.

In addition to the Corpus Christi project, Cheniere also has the Sabine Pass Liquefaction project, which has the capability to accommodate up to four LNG trains. The first commercial production from the Sabine Pass LNG facility is expected in 2015. In May this year the company has been able to secure loans amounting to $5.9 billion to facilitate the construction of LNG train 3 and LNG train 4 at Sabine Pass. The project's LNG train 1 and LNG train 2 are already under construction. The Corpus Christi project, along with the Sabine Pass project, would give the company a combined LNG processing capability of 4.3 Bcfpd.

Leverage is a good thing

The above table shows Cheniere's high proportion of long-term debt, which is resulting in a high interest payment for the company. The interest payment is going to rise further since the company secured the $5.9 billion loan for the construction of the two LNG trains at the Sabine Pass project.

We believe that this high debt amount is manageable because of Cheniere's long-term revenue generation capability from the export of LNG. Additionally, the company has already entered a sales purchase agreement, or SPA, for the sale of natural gas processed at Sabine Pass. Contracts are signed with BG Gulf Coast LNG, Gas Natural Aprovisionamientos, Korea Gas Corporation, GAIL, and Total. The fixed revenue from these deals will be around $2.6 billion annually. With these deals in place, the company will be in a better position to pay off its interest and debt incurred during the construction phase.

Seeing the opportunity in the LNG export market in the U.S., major oil and gas player, ConocoPhillips (COP), is also attracted. ConocoPhillips already has 50% ownership in the Freeport LNG project. This project is located in Texas, and has an approval to export around 2.8 Bcfpd to FTA countries and 1.4 Bcfpd to non-FTA countries. A further approval for export of 1.4 Bcfpd to non-FTA countries is waiting for approval from the DOE. Additionally, in September this year the Freeport LNG project entered a contract with Toshiba to supply a base quantity of 2.2 million tons per annum, or MTPA, for 20 years. Previously, the Freeport LNG project has signed long-term contracts to supply around 13.2 MTPA.

Another player in the LNG export market, Energy Transfer Partners (ETP), is developing the Lake Charles LNG export project along with BG Group. The project is located in Louisiana, and will entail the development of a three train liquefaction facility. The project received a boost after the DOE provided an approval to the project to supply 15 Mtpa, or around 2 Bcfpd, of LNG to non-FTA countries. The Lake Charles project's construction is scheduled to start in 2015. Energy Transfer Partners already has a natural gas import facility built in the Lake Charles project, and the new export facility will add capacity to the already existing infrastructure. This will enable the company to monetize the opportunity from the export of natural gas from the U.S.

Are the LNG export approvals good or bad?

Company

Enterprise Value/EBITDA, or EV/EBITDA

Enterprise Value/Revenue, or EV/ Revenue

ConocoPhillips

4.9

1.81

Energy Transfer Partners

12.45

1.03

Cheniere

(271.66)

46.49

The above table shows that Cheniere's EV/EBITDA is negative when compared with ConocoPhillips and Energy Transfer Partners. This is because Cheniere's major project at Sabine Pass is still under construction. This is also reflected in the company's high EV/Revenue ratio. Another factor contributing to the negative operating revenue is its high debt, which is causing high interest, reducing the company's net income. However, we believe that this low margin is short term and doesn't hamper its long-term prospects.

On a longer-term basis, the growth potential of Cheniere is high. The company is developing infrastructure for the export of natural gas, and its Sabina Pass and Corpus Christi projects should increase the company's export capacity of natural gas. Cheniere is poised to be a major player in the export of natural gas from the U.S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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